An economic and market environment that is difficult to assess

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An article I published just over a month ago covered whether or not the economy was in recession or not and highlighted some of the difficulties in assessing much of the economic data today. A stock market the recovery seemed to be starting after the June low before selling off in August. Another rally appears to be unfolding over the shortened Labor Day holiday week with the S&P 500 Index up 3.61% over this 4-day period. Then, the following Monday (9/12/2022) of last week, the S&P 500 added another 1.06% return. This positive momentum hit a wall on Tuesday with the August US Inflation Report with the release of Consumer Price Index data. The report notes that August inflation fell from an 8.5% annual rate to 8.3%, but the S&P 500 fell 3.59% on Tuesday. A few highlights of the report saw inflation rising. The core CPI, excluding food and energy, fell from 5.9% year-on-year in July to an annual rate of 6.3% in August. In addition, some services components saw inflation rates accelerate compared to the previous month.

Energy has a big influence on headline inflation and inflation continues to fall in this category. The fall in energy inflation is certainly positive; however, this is a category where the assessment of the sustainability of the price decline is unclear. The continuing Russian-Ukrainian conflict is one reason, but the continued release of oil from the Strategic Petroleum Reserve by the Biden administration is another. As shown in the graph below, the reduction in oil in the SPR has been significant and oil inventories in the SPR are now at a level last seen in 1984. These releases have most likely contributed to the recent decline energy prices.

Level of the strategic petroleum reserve as of September 16, 2022

Indications of the Does the Biden administration plan to fill the SPR in the near future, which will at least put a floor on oil prices and potentially see energy prices rise.

FedEx (FDX) brought in dismal income Friday, dropping the stock 21%. The company cited weaker demand in Asia and Europe as much of the weakness. Some consider FDX a proxy for the global economy given its interconnectedness in global economic activity with its parcel delivery business. Are the FedEx results an indication of broader weakness in global economic activity? Some say, however, that FedEx’s problems are company-specific. A recent article in Forbes Remarks:

“The business needs (and has needed) repairs, and now it has to deal with rising costs (inflation), expanding competition (such as U.S. Postal Service improvements and delivery services of Amazon (AMZN)) and a capital market that is becoming increasingly discriminatory in terms of risk and low sales/profits (And that means those overreaching “2025 financial goals” carry little weight. fact, they involve a casual management that further increases the risk.)”

Also Forbes The article points out that FedEx says it will cut capital spending next year, while maintaining the existing $1.5 billion stock buyback program. On the one hand, it may make sense to buy back shares when the company’s stock price is depressed; however, FDX could gain more benefits if these funds were used to improve its operations.

Another sign of potential economic weakness is seen in August imports passing through the largest US port located in Los Angeles. The Port of LA saw its biggest drop since May 2020 while inbound containers fell by 17%. Weak imports also show up in broader global shipping data. The Baltic Dry Index (BDI) basically measures global freight rates for dry bulk shippers. When the global shipping demand increases, the BDI also increases. The BDI peaked in October last year and has mostly trended lower since the indication of a drop in shipping demand, as shown in the chart below.

Baltic Dry Index and S&P GSCI Commodity Spot Index as of September 16, 2022

The S&P GSCI Commodity Spot Index is also displayed on the chart above. The commodity index started falling in June and indicates that demand is slowing. Scott Grannis, a former economist at Western Asset Management, recently wrote an article highlighting why inflation may have already peaked. Scott argues that inflation has likely peaked and thinks the Fed might not be as hawkish as the collective wisdom of the market thinks. If the Fed slows its expectations for a rate hike, the article says that this fact could lead to a positive outcome for the economy and the market. The article, Strong Dollar Tells Powell to Relax, is well worth reading.

In conclusion, much of the economic data seems to indicate that the economy is slowing down. This is not a surprise as the GDP figures for the first and second quarters were negative, indicating negative economic growth. The data assessment is compounded by the supply chain disruption resulting from the pandemic. If inflation is under control as detailed in Scott Grannis’ article, and the Fed is closer to a pause than not, a favorable environment could unfold as the end of the year approaches. As noted in a previous article, some of the strongest returns in the stock market follow midterm election years. This year being such a year, a rally after the midterm elections could take place as shown below.

Calendar Year Returns After Midterm Election Years

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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